Thursday, September 11, 2014

- by New Deal democrat
You may remember 3 months ago when Q1 GDP was revised all the way down to -2.9%, from an initial report of +0.1%, the main culprit was a sudden and unexpected decline in health care costs. The BEA acknowledged that this came from exactly one report: the Census Bureau's Quarterly Services Report.

I wrote a post confirming something Dean Baker (?) had written: namely, that the same thing had occurred 50 years ago when Medicare was inaugurated. There was a one quarter sudden and anomalous decline in GDP. But then it was followed by a surge in the next quarter.

Well, this morning the Quarterly Services Report for the 2nd quarter was released, and it shows a similar surge in Q2 compared with Q1. Hospital services, which unexpectedly declined -1.3% seasonally adjusted from Q4 2013 to Q1 2014, rose by +2.6% in Q2 2014. The larger aggregate of health care services, which isn't seasonally adjusted in the report, rose +3.0% in the 2nd Quarter, after declining -2.0% in the 1st.

In comparison, the Q1 to Q2 change in 2013 for health services was about 2.2%, and added .4% to GDP.

While I am no maven of the minutiae of how GDP is calculated, nevertheless since 2nd quarter 2014 GDP as presently revised only shows a +.05% contribution by health care, it appears that at very least 2Q 2014 GDP is likely to be revised upward to 4.5% or better.

Even if so, the bad news is that the combined GDP for the first half of 2014 would still only be about +1.2%.

Wednesday, September 10, 2014

- by New Deal democrat
In mt last post, I politely took issue with Dean Baker's claim that August's mediocre jobs number was not an outlier. Rather, I pointed out, for the last 3 /12 years we have had an unusually strong trend in job growth compared with GDP growth.

The YoY percentage of jobs added since World War Two has been about -1.5% less than the YoY percentage growth of real GDP. In other words, if GDP is about 2%, about half of the time there has only been 0.5% job growth or more, and about half the time there has been less than 0.5% growth. Since the beginning of 2011, however, GDP has grown gernerally between 1.5% and 2.5% a year, but job growth has also ben about 1.5% a year -- about 1% higher than that median historical trend.

Here's the graph of YoY jobs - YoY GDP adjusted by 1.5%, so that the long term median is 0, for the last 30 years:

Here is a graph you've seen a number of times before. This is a graph of initial jobless claims as a percentage of the entire civilian labor force, plus those who are not in the labor force but want a job now:

What this adjustment does is tell us what percentage of people who hold a job, or want a job, are laid off in any particular week. In this way it takes into account demographics and in particular, the large cohort of Boomers over 55 years old who are retiring in droves.

What you can clearly see is that this ratio is extremely low. Relatively speaking, the rate of layoffs is equal to the lowest in the last 50 years. Another way of looking at this data is that employers are running particularly tight ships. Compared with the entire post-WW2 era, they have pared the number of workers they need down to the absolute minimum for the current level of work.

The next graph is the percentage of all jobs that are temporary jobs:

This graph is just the opposite of the initial jobless claims graph. It is at an all-time high.

Putting this all together, we have an employment environment where, compared with the post-WW2 era, employers have exactly enough employees to cover a regular workload with no slack whatsoever. When the workload increases, the existing workforce is not sufficient to handle it. New workers, with a bias towards temporary workers (who aren't entitled to medical benefits and whose contract can be terminated at any time) need to be employed. This compares with the earlier era where new work meant that the slack in the workloads of existing employees was pared down. The net result is that increased activity (increased GDP) leads to a need for relatively more new hires.

One way to test that is to compare hours worked with jobs created. Once existing workers are pushed to the limit, the only way to increase output is to hire more workers. As it happens, we can test exactly that by comparing aggregate hours worked in the economy (blue) to total jobs (red), and norming each to their prior peak in 2007:

What we see is that aggregate hours increased more than jobs until the entire shortfall was made up by about the beginning of 2012. Since that time, both series have moved in nearly identical trends. While it's not a perfect fit, it suggests that at least since the beginning of 2012, current employees have been fully utilized. Increased output has required additional workers.

It seems to me this is a good explanation for the relative outperformance of job growth vs. GDP growth in the last 3 1/2 years.

If you agreed with all the academics, billionaires and politicians who denounced Federal Reserve monetary policy since the financial crisis, you missed $1 trillion of investment returns from buying and holding U.S. Treasuries. That’s how much the government bonds have earned for investors since the end of 2008, when the Fed dropped interest rates close to zero and embarked on the first of three rounds of debt purchases to resuscitate an economy crippled by the worst recession since the Great Depression. The resilience of Treasuries represents a rebuke to the chorus of skeptics from Stanford University’s John Taylor to billionaire hedge fund manager Paul Singer and U.S. House Speaker John Boehner, who predicted the Fed’s unprecedented stimulus would lead to runaway inflation and spell doom for the bond market. It also suggests investors see few signs the five-year-old expansion will produce the kind of price pressures that would compel Fed Chair Janet Yellen to side with the central bank’s hawkish officials as they consider when to raise rates.

I wrote an email to Powerline Feedback yesterday:

Gentlemen,

The writers at Powerline have uniformly argued the Fed’s policy of quantitative easing would lead to massive inflationary pressure.

However, as pointed out in a recent Bloomberg article (see link below), if someone had followed this investment thesis (which would have led them to bet against the US Treasury Market) they would have lost a large amount of money.

Do you have any intention of issuing any type of “mea culpa” regarding your incorrect analysis?

Actually, the numbers match the market very well. The economy grew at a 1.1 percent annual rate in the first half of the year. Faster growth in the second half of the year might bring the rate for the whole year to 2.0 percent. If we assume that productivity growth is 1.5 percent, this would imply an increase in the demand for labor of 0.5 percent. That translates into 700,000 jobs for the year or roughly 60,000 a month.

Let me state right here that, like Bill McBride a/k/a Calculated Risk, I think it most likely that August is simply an outlier. As Jeff Miller pointed out on Sunday, the standard error in this series runs up to 100,000 a month, and as Bill pointed out, even in the best years for job growth, there has always been at least one faceplant.

You can probably see the issue here right off the bat: If Dean is correct that August wasn't an outlier -- that if anything it was above trend at 142,000 -- then what about the last 7 months, in which 1.4 million jobs, or over 200,000 a month were added? Were they all outliers? In a row? In fact, what about the last 3 1/2 years, as I'll show below.

To begin with, if we go back 65 years, all the way to 1948, when we can track both GDP and jobs, there have been 266 quarters in total. When we compare real annualized job growth vs. real annualized GDP growth over those 266 quarters, the median difference is about 1.5%, meaning that in about half of those quarters, real GDP growth exceeded job growth by 1.5%, and in the other half real GDP growth was less than 1.5% higher than job growth. Here's the graph - you'll just have to trust me on the count, unless you want to do it yourself!:

Here's a closer-in look at the last 30 years:

Two things to notice are (1) there is a lot of variability around that 1.5% median, and (2) since the beginning of 2011, job growth has been well above trend in about 2/3 of the quarters, sometimes by over 2.5%.

Here's a slightly different way to look at the same thing. This is the YoY% of real GDP growth (red) compared with the YoY% of job growth (blue):

You can see that job growth has typically been only about 0.5% to 1.0% less than real GDP growth for the last 3 1/2 years, in other words +0.5% to +1.0% higher than the long term trend that is Dean's benchmark.

So my question to Dean Baker is, respectfully, if August isn't the outlier, then what is your explanation for the job growth of ~8.2 million, or nearly 200,000 a month, for the last 3 1/2 years?

Monday, September 8, 2014

- by New Deal democratLast Thursday the Federal Reserve came out with its Report on Consumer Finances for 2013. This is the most in-depth cross-sectional look at the state of America's household balance sheets, so it is going to get a lot of play. Some of that discussion is going to be on point, and some of it will be misleading at best. So I thought in addition to giving you some value-added, that you probably won't read about elsewhere, I'd discuss a few ways the report is likely to be misinterpreted.

An important limitation: the survey badly lags

Before I begin in earnest, let me point out one important limitation of the study. You are probably going to read a lot of analysis couched in the present progressive tense, as in, "income is declining." That's not a true statement. Because this survey is only conducted once every 3 years, the only comparison is between 1 year ago and 4 years ago. The survey is unlikely to pick up a turning point that took place in 2012 (e.g., real median or average wages as measured in other reports). For that, we'll have to wait for the 2016 report which will be published in 2017! So you can see that this survey, while thorough, is badly lagging.

The economic rift in American society has been growing

So far what I have read hits the two biggest points:

1. Median income and wealth both declined compared with 2010 across cross sections

2. the divide between haves and have-nots is increasing. Somewhere between the 50th and 75th percentile of income, a rift is developing. Balance sheets are improving roughly for the top 1/3 of Americans, and the higher the income percentile from there, the greater is the improvement. For roughly the bottom 2/3 of Americans, their incomes and wealth are declining.

For example, Digby highlighted the graph showing that the share of overall wealth owned by the top 3% grew. That for the next 7% is flat, and that for the bottom 90% shrank.

That wouldn't necessarily be so bad. For example I'd rather own 9% of a $120 pie than 10% of a $100 pie. The bigger problem is that, as shown in the graph below (2010 is left column, 2013 on right):

the bottom 90% has seen an outright decline in absolute wealth.

The millionaire next door is likely to also be known as "mom and dad"

As the above graph shows, the household at the 82.5th percentile is worth about $500,000. the 95th percentile is worth just shy of $2 million. A reasonable guess is that 10% of all American households are worth $1 million.

Now let's see how wealth skews over age groups:

As I've said before, a 25 year old worth $250,000 is for all intents and purposes, rich. A 65 year old worth $250,000 years old is no better than working class.

While the survey doesn't tell us what percent of millionaires are Boomers, the likelihood is that they are the lion's share.

While declining median wealth is widespread, demographics probably plays the biggest part

Next up, here is the graph of median incomes by age group:

Note that median income starts to drop off at age 55, and especially after the normal retirement age of approximately 65.

Since the number of people in the 25 to 54 age group has stagnated over the last 20 years, while the population over age 55 has surged in the same time period, as shown in this graph:

real median household income has declined as a simple matter of demographics.

It is interesting, and distressing, that median incomes have declined for declined drastically for those ages over 45-54 in particular. I'd like to blame this all on the unemployment rate, but with the comparison period of 2010 (the peak in the unemployment rate was in 2009), it looks like there has been real hardship in this group in particular. So demographics is not the only thing at work. Still having a huge demographic retired into a lower income distribution has to be skewing the overall median figure more than anything else.

For wealth, asset classes made a huge difference

Although not a surprise, the report confirmed that, the more you relied on savings and on bonds, the more you suffered in the last few years. Contrarily, if your main source of wealth was stocks, Happy Days are Here Again:

This is a graph of wealth, so it isn't just that CD's and bonds basically are paying nothing, it appears that people en masse pulled off of those asset groups. It is likely that hose who could, rotated into stock mutual funds and ETF's. Needless to say, the working class normally has its wealth ties up in housing (which lost value) and savings, whereas the wealthy have always had a far bigger share of wealth in investments like stocks. This only exacerbated the divergence in wealth.

The Federal Reserve report is further confirmation, as Business Insider put it on Friday, that Piketty was right, as was the Occupy Wall Street movement. Until Washington is forced to respond more to the people than the plutocrats, we can expect the long-term trend to continue.

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